Aussie debt is about to top half a trillion

Thu, 15 Jun 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/article-231056138.html 

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Aussie debt is about to top half a trillion dollars

Australia’s government debt is poised to break through half a trillion dollars. As of last week, it stood at $0.4992 trillion.

Half a trillion dollars, is $500,000,000,000.00 of gross debt on which the government will be paying interest of around $15 billion each year – and that assumes that interest rates remain at the current record lows.

Government debt has been on an upward path since the global financial crisis hit the economy in 2008. The GFC saw a significant fiscal stimulus where government spending increased substantially as it delivered enough support so that Australia avoided a recession. It was text book economics but the price of avoiding recession was a rise in government debt.

More recently, structural changes in the economy have seen chronically weak wages growth and below target inflation locked into the landscape. These trends have undermined government revenue at a time when government spending is still running well above the levels prevailing before the GFC. Efforts of the government to cut its spending is recent budgets have not only failed, but spending is actually rising at a strong rate.

As a result of all of this and some reckless pre-GFC policies that wastefully sprayed money around the economy, the budget has been in deficit since 2008-09 and is set to remain in deficit until at least 2019-20. And while ever the budget is in deficit, gross government debt keeps rising.

Half a trillion dollars of government debt is a new record and according to last month’s budget papers, government debt is set to hit $725 billion in the mid-2020s. Government debt was ‘just’ $273 billion at the time of the September 2013 election when the Coalition promised to return the budget to surplus and ‘pay off’ debt. It has failed in this policy.

What is concerning is that the $725 billion debt forecast assumes the budget moves to surplus by 2020-21 and stays there after that, which is a scenario that just about everyone other than Treasury judges to be unlikely For now, the government is having no financial management problems raising debt. Australia’s triple-A credit rating is safe for now, which ensures fund managers and others are willing to finance the ever growing levels of debt at the current level of interest rates.

And while a credit crunch where investors shun Australian government debt is unlikely to show up any time soon, if the level of debt rises at a significantly faster pace than currently forecast and there is a credit rating downgrade or two, investors will be less willing to lend to the government at current interest rates.

In other words, an unexpected debt blow out from already elevated levels because of a slump in housing or protracted weakness in commodity prices or some other issue would not only see debt rising more quickly, but interest costs escalate. At the same time, the Australian dollar would almost certainly fall, and by a large amount, which would push import prices and inflation higher, which in turn would erode living standards.

While the half trillion dollars of government debt is not yet a problem, a point could soon emerge where the government will need to take action to address the debt escalation. It appears that economic growth is not enough to fix the budget and control the debt level.
This means that tax hikes and / or spending cuts will be needed in the not too distant future. This might be best achieved when, one day, the economy is stronger.

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Thu, 22 Feb 2018

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

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Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

When next for the Aussie dollar?

Wed, 21 Feb 2018

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

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What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.